Financial Tools Presentation

Easy to Use Financial Tools for Effective Decision Making Paul M Dooley President Optimal Connections, LLC P: (949) 305-3544 E: pmdooley@optimalconnections.com W: www.optimalconnections.com Typical Decision Challenges You May be Facing      Should I remain with the status quo, or implement a new Service Management System (SMS)? If I implement a new SMS, which one should I choose? Is it worthwhile for me to implement a Knowledge Management System? Should I invest in Remote Access Tool A, B or C? Is it wise for me to consolidate our multiple help desks to a centralized Service Desk, or should we remain decentralized? Optimal Connections, Agenda   Decision Making Challenges How to Use Financial Tools to Help: – – –    Cost/Benefit Analysis (CBA) Return on Investment (ROI) Total Cost of Ownership (TCO) Steps in Applying the Tools Valuable Resources Summary Optimal Connections, Someone Once Said … “Success in life often depends on the choices we make.” How you make the right choice? Take advantage of best practices and available financial tools that can help you make better quality decisions Optimal Connections, How Do I Know Which Course of Action to Take?  Let’s see, I could … – – – – – – Guess Pick one, based on the ‘good old boy’ network Focus on the ‘coolest’ technology Pick the one that’s cheapest (up front) Choose the one that’s got the most ‘features’ Base my decision on what my management thinks (what – consider the users?) Optimal Connections, Why Not A More Business Like Course of Action   Follow a best-practice selection process Use a combination of financial tools to improve the quality of your decision – – – –   Do the benefits really justify the cost? How long will it take to recover our investment? It the investment really worth it? What is the true total cost over the life of the asset? These tools are not new – they have been used for decades by organizations of all kinds Applying them to IT Services is simply good business practice Optimal Connections, What’s In It For You?        Demonstrate a ‘business approach’ Minimize risk and costs through informed, higher quality decisions Increased credibility with management Build stronger Business Cases for proposals A more strategic approach, aligning with business goals Help ensure successful business outcomes for customers, through improved service provisioning Be a good steward of investments in IT services Optimal Connections, Tools to Improve the Quality of Your Decision Making  The three tools we will focus on are: – Cost/Benefit Analysis (CBA): Weighing costs vs benefits, and calculating payback – Return on Investment (ROI): is it worth the investment? – Total Cost of Ownership (TCO) – what is the total cost of ownership over time? Using these tools in concert will help you make better quality decisions and build stronger business cases for proposals! Optimal Connections, Cost/Benefit Analysis (CBA) Overview   Technique for deciding whether or not a change is worthwhile Add up the value of the benefits of a course of action, subtracts associated costs, and come up with an advised decision – Costs: one-time, and on-going – Benefits: usually realized over time   A time factor is built by consideration of a “pay back period” Key: assign a financial value to both tangible and intangible benefits – Placing a financial value on intangibles needs to be justifiable Optimal Connections, How to Do a Cost/Benefit Analysis (CBA): Steps Establish a common unit of valuation ($) Identify all of the tangible costs – Hardware, software, training, documentation, maintenance support, consulting, opportunity costs Total all of the costs Identify all of the benefits – Tangible benefits (where it is easy to quantify the savings) – Intangible benefits (assign values based on estimates, justifiable assumptions) Total the value of benefits in year and beyond Determine payback time: divide [costs] / [benefits] Optimal Connections, How to Calculate Total Cost of Ownership: Steps Fill in all the data – – – Direct costs Indirect costs First year and re-curing costs over the useful life of the asset (example – years) Use the tool to calculate the Total Cost of Ownership over the useful life of the asset Optionally, compare the TCO of this option with that of another option, and the TCO of the ‘status quo’ Determine which option has the lowest TCO Here is what our sample nets out to (next slide)… Optimal Connections, Year Life-cycle, with upfront and recurring costs Sample Tool: TCO Calculator, from InfoTech Research Group Optimal Connections, Optimal Connections, TCO Calculation: Applying to our Scenario    How does TCO relate to CBA and ROI? TCO shows long term costs, not cost vs benefits, or ROI To arrive at a quality decision, we need apply all three tools and account for the time value of money: – – – – –  Assume a 5% required rate of return CBA payback: $114,000 / $180,000 = approx months Costs of $129,860 over yrs discounted to Present Value = $123,676 Benefits of $540,000 over yrs discounted to Present Value = $514,287 ROI: 57.8% for 1st year, however years ROI is much greater:  NPV of yr Benefits vs Costs: $514,287 - $123,676 = $390,611  $390,611 / $123,676 = 3.158 * 100 = 315% ROI over yrs! Bottom line: rapid payback of initial investment, and high ROI over the life of the asset, with acceptable TCO GO for it! Optimal Connections, Applying the Tools: a Best Practice Selection Process        Step 1: Form a team, project and a needs analysis Step 2: Prepare a Requirements Definition Step 3: Go through a diligent selection process to evaluate proposals Step 4: Arrive at ‘short list’ of suppliers Step 5: Apply the financial tools we discussed to build a business case for the best decision Step 6: Make the decision and negotiate Step 7: Implement and track your results Optimal Connections, Step 1: Form a Team and Do a Needs Analysis      Form a cross-functional team Appoint a project lead, and develop a project plan with milestones, resources and time frames Conduct kick off meeting to define and prioritize needs Set expectations, and communicate! Do a Needs Analysis: allows you to analyze the situation to see whether the technology is truly needed immediately May include… – Surveys, interviews and observations to gather detailed input – Reviews of past metrics – performance, customer, employee   Establish a baseline (KPIs) for later comparison Consider best practices for the area, as well as industry analysts Optimal Connections, Source: HDI SCM Step 2: Prepare a Requirements Definition  Document all requirements for the proposed system or tool – – – – –    Background Customer end-user requirements Current support processes Desired features and functions Other: usability, scalability, portability, or compliance Categorize requirements, and list priorities (must have, nice to have, optional/plus) Weight requirements, use numbers to quantify Factor in optional additional information: – – – – Special requirements from key stakeholders Available budget allowances Anticipated volume of transactions for scalability Number and type of support staff required Optimal Connections, Source: HDI SCM Step 3: Conduct a Diligent Selection Process     Identify vendors/suppliers who potentially can meet your needs Send a RFP out to target suppliers, gather responses Use a checklist to process responses Considerations during the process: – Investigate quality of vendor technical support – Review demonstrations by selected vendors – If you opt for a ‘trial’, for testing consider:     Conformance testing to requirements Load testing End-user testing Communications – notify stakeholders in advance of changes in the works, and keep them informed! Optimal Connections, Source: HDI SCM Step 4: Arrive at the Short List of Suppliers   Schedule interviews for the short list of vendors Considerations: – Use a ‘script’ to guide the interviews – Include your team in the demonstrations – Determine if you can get trial or pilot use    Visit vendor customer sites, explore service quality, check on industry reputation Also check the company – depending on the investment, sometimes the company you are dealing with is also an important consideration! Based on the proposals returned in answer to your Requirements Documents, which products/service providers most closely fulfill your needs? Optimal Connections, Step 5: Apply the Financial Tools in Combination  Apply the Financials Tools to this short list of solutions: – Cost/Benefit Analysis (CBA) – Return on Investment (ROI) – Total Cost of Ownership (TCO)  Considerations: – Net tangible and intangibles to a common financial metric (usually $) – Account for the time value of money – Which provides the best cost to benefits ratio? – Which provides the best return for the money? – Which provides the lowest total cost of ownership over the life of the investment? – Bottom line: which is the best decision? Optimal Connections, Step 6: Document the Business Case for the Decision   All three tools should be used together to help assess which action is best to take! Document your Business Case based on the result of the selection process, and the output of the financial tools … – Include exec summary, goals & objectives, supporting evidence: CBA, ROI and TCO of alternatives, with recommendations – Review with your management and gain their support  Negotiate with preferred vendor to arrive at final feature set, with pricing and delivery terms Optimal Connections, Step 7: Implement the Decision and Track Results  Key: follow best-practice project mgt practices – Qualified project lead – Committed, cross-functional team – Solid project plan with milestones, assigned and budgeted resources, and time frames – Communicate effectively: across the team, and to affected stakeholders     Prioritize early, easy wins! Drive the project, accomplish the milestones, and report on the benefits Compare the results to your baseline(s), and report results Celebrate success with your team! Optimal Connections, Summary: Using the Financial Tools Together Help You…        Use a ‘business approach’ to decision making Minimize risk and costs through informed, higher quality decision making Increase credibility with management Build stronger Business Cases for proposals to management, increases chances for approval Align with business goals, and support the vision and mission of the business Ensure successful business outcomes for customers, through effective and efficient service provisioning Be a good steward of investments in IT services Optimal Connections, Valuable Resources to Take Advantage Of!   Handout: CBA Template Calculating Cost/Benefit – Mind Tools CBA Tool: www.mindtools.com  Calculating ROI – Guidelines: www.silberperformance.com – Tips: eHow.com – Online Tutorial - ZDnet.com: http://news.zdnet.com/2422-13569_22-153325.html – ROI Calculator: www.solutionmatrix.com  Calculating TCO – Info-Tech Free TCO & ROI Calculator: www.infotech.com Optimal Connections, Happy Decision Making! Any questions? Thank you for attending this session Please fill out a session evaluation form Optimal Connections, Paul M Dooley President Optimal Connections, LLC P: (949) 305-3544 E: pmdooley@optimalconnections.com W: www.optimalconnections.com ... Making Challenges How to Use Financial Tools to Help: – – –    Cost/Benefit Analysis (CBA) Return on Investment (ROI) Total Cost of Ownership (TCO) Steps in Applying the Tools Valuable Resources... choices we make.” How you make the right choice? Take advantage of best practices and available financial tools that can help you make better quality decisions Optimal Connections, How Do I Know Which... Business Like Course of Action   Follow a best-practice selection process Use a combination of financial tools to improve the quality of your decision – – – –   Do the benefits really justify the